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By Iniel van Zyl*
The Covid-19 pandemic has left almost everyone strapped for cash. Apart from cutting back on luxuries and keeping budgets tight, there should always be a portion set aside for a rainy day or your golden years – no matter how small it may be – and try your best to not get caught up in a debt trap.
Whatever your age or situation, the time to start planning for your retirement starts now.
Planning is the only way to avoid unpleasant surprises, like not being able to do so, or running out of funds. The key to retirement planning is starting when you still have enough time to accumulate adequate savings before the amounts you must save become too high.
It can be a simple start like opening a savings account or investing in small amounts. Not only does the interest returns increase on the same capital invested but if those returns are reinvested along with the capital, the compounding interest increases significantly.
The first step is to ask yourself, how much you would need to be able to retire comfortably. That is followed by four more steps.
After you have established your investment goal you have to decide at what age you want to reach it by.
Be aware that if you want to retire early, you will need to save more money because you will be living off your retirement income for a longer period.
The amount of money you will need at that point of time, will depend on what type of life you want to live after you retire. Experts often express the amount of money you will need as a percentage of pre-retirement income. In determining this percentage, you need to take into consideration that some types of expenses will likely decrease or disappear like car payments or spending it on the latest fashion trends. It could also include paying off your bond or sponsoring your child’s university degree. Other costs like medical aid or assisted care might go up.
After you take inventory of all your potential income sources during retirement, like lump sum pay-outs or income from living annuities, or fixed income investments.
What you want to do is estimate your total retirement income from all sources, considering the savings you have already accumulated as well as future contributions and future investment income.
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Using a calculation tool or consulting a qualified financial planner can be most helpful at this stage. When you know where you stand, you will be able to determine if you are on the right track. If you are not on track and the figures show that you will likely not reach your objectives with what you already have, you can then decide to increase your savings and/or change your investment strategy… or modify your plan.
Know your retirement income sources, planning a savings and risk strategy (try to save at least 10% of your monthly income if possible), actively monitor the progress of your strategy and adjust where needed. Utilise the long-term benefits of a tax-free savings account, be smart with debt- keep high interest debt as low as possible i.e., credit card debt, shopping accounts etc., be smart with your spending habits- do not splurge on items not required or out of line with your savings strategy. Build up an emergency fund for possible unexpected expenses i.e., car and household expenses.
Step number 4 is monitoring your progress and making adjustments if your circumstances change dramatically.
For successful long-term planning, you also need to review your plan regularly to see if it needs to be modified. Your financial situation and economic conditions will change over time and you will likely need to adjust as you go along.
Earlier, there was a time when people used to retire between 55 and 60 years. During those days, the economic situation was different as opposed to what it is now. Now the average life expectancy for males and females are also increasing; people now-a-days work beyond the age of 60 years. This is to ensure financial security for the dependent family members.
Remember that retirement planning is a multistep process that evolves over time. To have a comfortable, secure – and fun – retirement, you need to build the financial cushion that will fund it all. The fun part is why it makes sense to pay attention to the serious and perhaps boring part: planning how you will get there.
- Things to remember:
- You should always include determining time horizons,
- Estimate expenses,
- Calculate after-tax returns,
- Assess risk tolerance,
- Do estate planning.
- Start planning for retirement as soon as you can to take advantage of the power of compounding interest.
- Younger investors can take more risk with their investments, while investors closer to retirement should be more conservative.
- Retirement plans evolve through the years, which means portfolios should be rebalanced and estate plans updated as needed.
Read more about retirement planning.
- Iniel van Zyl as an advisor at Brenthurst Fourways. [email protected]
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